One of the major weaknesses of novice traders is that they do not understand how to 'work' a trade. They make a single buy of a stock they like and then look to make a single sale after it has gone up. In other words, they apply a buy-and-hold approach to trading but use a much shorter time frame than an investor would use.
That passive approach can work but the most profitable traders learn how to 'work' a trade. The benefit of working a trade is that it helps you to minimize risk while enhancing potential return. It requires much more time and effort but the benefits can be tremendous if done right.
The idea here is to constantly adjust your position as a trade evolves. When the potential for a good outcome looks better you build your position and when it looks like a trade might not work then you cut your exposure. The key is that you do this incrementally. You maintain a position in the stock the whole time but keep changing your level of risk by adding or subtracting shares.
The challenge of this approach is to stay patience and not be fooled by random movement while the trade develops. It is very easy to over trade and react to every small movement so you must develop some parameters to prevent churning. The biggest obstacle to this approach is your emotions. You have to constantly address your emotional reaction to movement that may not be meaningful
The primary goal of working a trade is to be in position so that you can maximize returns by being highly aggressive at the right time. Jesse Livermore used an approach he called 'probing' to implement this strategy. He would take an initial position but would only add to it as the trade made progress and he liked the way it looked. He made the trade prove itself before he would commit more capital.
The initial buy is just the initial step in this approach and is not the more important step. It simply focuses your attention and prepares you for a series of subsequent steps. Putting a good stock on the radar is very beneficial but the hard work is designing the trade.
Lets take a look at Pyxus (PYX) , which was a very successful Stock of the Week at SharkInvesting.com, as an example. PYX traded up nicely in anticipation of its earnings report and then moved sharply higher on the news. I believe that this stock has the potential to move significantly higher over time, so the question is how do I position myself to benefit while reducing risk if I am wrong?
The important thing to keep in mind when working a trade is that we are embracing the fact that we can't predict the future. It is not prudent to just buy a huge position because we 'think' it might work. We want to shift the odds in our favor and we do that by 'working' the trade. There is new information every day and we should use that information to our advantage.
If you want to reduce risk and maximize gains don't just buy-and-hold a trade, work it.